Alcoa Makes The Turn, Aluminum Is The New Steel

| About: Alcoa, Inc. (AA)


Alcoa surprised analysts with earnings of 18 cents per share.

The big gains came in engineered products for airplanes and engines.

The need for energy efficiency means the gains are sustainable.

Energy efficiency has made aluminum the new steel.

That's the lesson of Alcoa's (AA) results yesterday, which beat analyst expectations with profits of $138 million, 18 cents per share, on revenues of $5.84 billion.

In the conference call Alcoa emphasized its success in the "engineered products business." In short, engines.

This is a long-term trend that is only now coming to fruition. Because aluminum is lighter than steel, it is more energy efficient in engines, and a better material in transportation. But aluminum is also less sturdy than steel, meaning durability has always been a question.

Alcoa has been working on variations of aluminum lithium, often using copper and zirconium. The resulting product is now ready for prime time, for use in airplane skins, rockets and helicopters. Alcoa recently bought a maker of jet engine components, Firth Rixson, in order to expand this niche.

Alcoa has also been working on aluminum engines, and now gets big orders from companies like General Motors (GM). Aluminum engines weigh less than steel, thus delivering better gas mileage.

Not all the news out of Alcoa looks good. It's still reducing its footprint in aluminum smelting. But the overall results point to a company getting more money out of the aluminum it makes, through engineering and fabrication. That's leverage for investors.

A turn toward fabrication is a promise Alcoa has been making to investors for years, but until now it wasn't reflected in financial results. Instead the company was taking big write-offs on production assets. For instance, Alcoa took a huge loss in the fourth quarter of 2013, $2.34 billion or $2.18 per share, which is why it currently doesn't show a P/E. The loss narrowed to $178 million in the first quarter and has now swung to profit. If the current pace can be maintained for a year, it would imply an above-market P/E of 19.

The fact that the strategic turn is now being reflected in financial results should mean good news going forward, which is why shares popped nearly 3% in early trade.

Analyst estimates on earnings are now likely to be taken up - most were figuring on earnings of just 48 cents for all of 2014. This could lead to upgrades and further gains in the stock.

My own guess is you're looking at a 20% gain over 2014, but run the numbers yourself before you invest.

Disclosure: The author is long GM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.